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March 14, 2006

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How I made 148% in the 2005 World Cup Championship of Futures Trading®

Name: Kevin J. Davey

Company: WorldCupAdvisor.com

Learn More About Today's Author
Years Trading: 15

Favorite Movie: Jaws

How I made 148% in the 2005 World Cup Championship of Futures Trading®

“Overnight success.” I’ve heard that term quite a few times in the last few months, as people learn that I achieved a 148% net return and a second-place finish in World Cup Championship of Futures Trading in 2005. Since you’ve probably never heard my name mentioned before, you might be inclined to think the same thing. But the fact is the futures markets are littered with overnight failures and overnight successes are few and far between.

I’ve been speculating in futures for 15 years, and it took me most of that time to become an “overnight success.” Even though turning $15,000 into over $37,000 in one year entailed some luck, I know I could not have gotten there without following certain steps. In this article, I’ll detail these steps, steps that worked so well for me. My guess is that they’ll work for you, too.

Step 1: Have a Plan

I’ve never seen someone build a house from scratch without drawings, sketches or architect’s renderings, and I bet you haven’t either. To build a house, you need a set of plans. The same holds true for speculating in the futures markets – without a plan you are destined to fail. Trust me – I tried to succeed without a plan a few times. The market, however, had a plan – to take all my money – and it succeeded.

So what makes for a good plan? I think there are three major pieces to it. First, you must know what you want. Second, you must determine what you are willing to invest. Finally, you have to know what you’ll risk, as nothing worth having comes free.

The first step in a good plan is to know what you want, since your objective will help determine your strategy. For example, if your goal is 4%, you can find many CDs that yield 4%, but CDs won’t do the trick if your objective is 150%. In my case, I knew what I wanted – to win the World Cup trading contest. So, after looking at previous winners, I determined that if I achieved their median return, I’d have roughly a 50/50 shot at winning. This told me I wanted a 200% return in one year.

The second portion of a solid plan is knowing what you are willing to invest to reach your goal. In the investment arena, this takes the form of time and money. How much time and money will you spend researching, studying, going to seminars, talking to advisors, etc. to achieve your goal? For me, my investment was software, books such as Market Wizards, and other investment knowledge from gurus at various trading websites. I also dedicated 15 hours a week to study, which didn’t exactly please my wife! The point is to realize that investment is necessary for success.

The last piece of the plan is to determine your risk threshold. How much money are you willing to put at risk to achieve your goal? If it is less than 10%, you can’t realistically expect returns of 100%, although I’m sure some people have done that well. Know your “walk-away point,” the point at which your losses cause you to quit. Knowing this risk threshold will help you as you develop your strategy, which is step 2.

Step 2: Find a Strategy

You might not think it’s true, based on trading ads and infomercials you see, but finding a strategy is very difficult. If it were only as easy as going to a free seminar in a hotel! In reality, finding a good strategy involves three areas: skill assessment, research and detailed development.

The first part of finding a strategy is to do an accurate, honest skill assessment. What are your strengths and weaknesses, trading-wise? Can you program your own system, or do you need an advisor such as those on WorldCupAdvisor.com? This assessment, if done right, will point you toward a strategy. Without this assessment, you are doomed. Before I started trading, I took a long, hard look at my abilities, and determined I had the skills to create my own system. The key is to match your skills to your strategy.

Next comes research. Before you settle on a strategy, you need to see what is out there working today. Books, magazines, and websites are a great way to see what is “state of the art.” Without current information, you may be researching old, tired ideas that don’t work anymore. Numerous websites and newsletters (such as Trader’s Media) give excellent free advice. It is best to hear what opposing viewpoints are out there, before you leap into trading.

Once you know your skills, and you’ve done the research, it’s time to get your hands dirty by doing detailed development. Of course, the level of detail depends on the trading route you chosen. Since I decided to do my own strategy development, I’ll share the highlights of what I did.

  1. Determine the basic type of system – trend following, swing trading, etc. I chose trend following – it is time-tested.
  2. Determine basic indicators – oscillators, moving averages, etc. For my system, I chose an x-day breakout with an oscillator confirmation.
  3. Optimize results – find what parameter values work, without over-optimizing.
  4. Walk-forward testing – verify system with untested data.
  5. Monte Carlo testing – perform random simulations.

Of course, I have greatly summarized the work and depth of the five steps above, but all need to be done to develop a robust strategy. Once this is completed, I recommend you check and double-check your work.

Step 3: Check and Double-Check

Remember in school the teacher always said “remember to check your work?” If you were like me, you thought doing the work was the hard part, and checking it was something you didn’t need. Well, if you avoid checking your work before trading a strategy, you can easily fall into trouble. In fact, I think checking and double-checking is so important that I made it a separate step!

The degree and type of double-checking you do depends on the strategy you determined in step 2. Below are some steps to consider if you selected an advisor, a black box system or built your own system.

  • If you are using an independent advisor:
    • Contact customer references
    • Check compliance records
  • If you bought an off-the-shelf system, or trade off of daily signals:
    • Ask for a real-time results history
    • Look for independently verified track records, such as on WorldCupAdvisor.com
  • For systems you develop yourself:
    • Be suspicious of results that are “too good to be true”
    • Create a mirror system, reversing buy and sell signals (does it perform well too? If so, you might have a programming error)
    • Paper trade, and see if results mimic your test results

Step 4: Execute Your Strategy

At this point, you are ready to trade your strategy with real money. In my experience, there are five areas to concentrate on in this step.

  • First, determine your level of involvement. If your strategy requires you to enter trades or speak with a broker during the day, make sure your work schedule can support it. If you are auto-trading on a home PC, do you have the support infrastructure?
  • The second key is finding a broker. The choice of broker (full-service or discount) will depend on your strategy and the amount of help you need. Most brokers have 24-hour desks and excellent order-entry software, with varying commission rates.
  • The third execution key, and possibly the toughest, is to pull the trigger when your strategy signals “trade.” Frequently, you’ll have signals that you want to ignore. My experience has shown that these trades can be the best ones. For example, currently I am very profitable in Copper. This signal was after Copper hit new highs, when it felt much easier to go short! Uneasiness at the start may be a very good thing.
  • The fourth key to good execution is not to overrule your system. If your system has been proven to give you an edge, it does not make sense to overrule it, since you will inevitably do worse on your own. This is another rule that sounds easy, but is extremely difficult to follow.
  • The last key to executing your strategy is proper money management. This is an enormous topic, to which this short article cannot do justice. Money management will not make an unprofitable system suddenly profitable, but mismanagement can make a profitable system unprofitable. The key early on is to stay in the game – don’t overtrade. Profits may come, but only if you have the capital to trade!

Once you have started to execute your strategy, work still continues, in the ongoing monitoring phase.

Step 5: Monitor and Adjust as Necessary

In manufacturing, an essential part of any robust process is process control. This tells you whether or not an operation is in control, and when corrective action is necessary. The concept of process control can be adapted to your trading, keeping your system on the right path.

In 2005, when I finished in second place in the World Cup competition with a 148% net return, I monitored each trade, comparing fill prices, etc. to my theoretical system. When discrepancies came up, I determined the reason, and fixed the process.

Another technique I found useful was keeping a trading log. Recording the details of trades, along with my thoughts, helped me review my performance. This log is especially powerful when you violate your system, as all of us have.

A final way to monitor results is to complete a year-end review. You might find, for example, that one or two markets were consistently poor because of slippage. This might lead you to trade those markets differently. The point is to look at the big picture (how did I do overall?) and the small picture (what happened on certain trades?).

Even with my outstanding performance in 2005, I still did a full-year end review. Afterwards, I made minor enhancements that should improve my 2006 performance. So, now matter how well you do, monitoring and adjusting has to be part of your overall plan.

Conclusion

So there you have it - the five steps to trading that I used to achieve a 148% net return in 2005:

Step 1: Have a Plan
Step 2: Find a Strategy
Step 3: Check and Double-Check
Step 4: Execute Your Strategy
Step 5: Monitor and Adjust as Necessary

Don’t be surprised if it takes a year or so for you to complete these steps. My advice is to not rush, and revisit the steps as necessary, until you feel totally comfortable. I obviously can’t guarantee that you’ll have the results I had, but I can tell you that the steps work, and work well.

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